Rating downgrade: Did S&P get it right?

CNNMoney.com via Fidelity.com ^ | August 7, 2011 | Jeanne Sahadi

[mlocher]

A credit rating is an informed opinion. Nothing more. Nothing less.

That helps explain why one major credit rating agency -- Standard & Poor's -- has downgraded the United States, while another -- Moody's (Symbol : MCO

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) -- has chosen to affirm its credit rating with caveats.

Both agencies had the same essential set of facts about U.S. debt: There's a lot of it now. There's a lot more of it to come. And there's very little in the way of actual policy today that looks likely to seriously change that outlook.

Where the agencies differ, however, is in their degree of skepticism that Congress will follow through on meaningful debt reduction.

S&P is pessimistic. It points to the reckless debt ceiling debate, which artificially tied the longer term need to reduce the debt with the immediate need to raise the borrowing limit to ensure the United States makes good on all its bills.

"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed." S&P said Friday in downgrading the United States to AA+ from AAA.

In some ways, it's easy to see why S&P is so pessimistic. Throughout the struggle to raise the debt ceiling, some lawmakers repeatedly suggested it would be better to risk default and not raise the ceiling until Congress passed a spending-cuts-only plan to reduce debt. (Read: Who is in the AAA club?)

"We clearly pose more of a risk to investors than we did previously. We're the only developed nation in the world that talks openly about default," said Donald Marron, a former acting director of the Congressional Budget Office.

[No more debt]

Those who are too young to vote or are not yet born are not responsible for this debt. They should refuse to pay it. What is the chance the rest of us will get the debt paid off?

[cableguymn]

Let’s get it straight liberals. This is not the tea party’s fault. WE WERE TRYING TO BALANCE THE BUDGET IN ORDER TO AVOID THIS. YOU WERE THE ONES FIGHTING US EVERY GD STEP OF THE WAY YOU OBNOXIOUS, DELIRIOUS, OVER SPENDING, SOCIALIST *%#@s. We tried like hell to cut spending. But you convinced yourselves that spending more than you take in is a perfectly reasonable acceptable course of action. This is your fault liberals.

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RIGHT YOU ARE!!

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you will most certainly be held accountable.

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Doubt it, sorry.

[Presbyterian Reporter]

Asian stock markets are now open.

Nikkei 225 9,202.10
8:42PM EDT -97.78 (1.05%)

[familyop]

You’re right. We won’t get it paid off. This is a debt regime headed full speed for default. So teach at least one humble young person to do some kind of technical work or repair. Let the vain go to their consequences.

[RC one]

It’s a fight that I will happily take up. They want to blame us for this? Bring it.

[No more debt]

Good point. Those who develop some skills and are willing to work will do well.

[chris37]

Alls I knows is dis.

I ain’t buyin’ no gubmint treasure bonds no how!

[Prokopton]

Throughout the struggle to raise the debt ceiling, some lawmakers repeatedly suggested it would be better to risk default and not raise the ceiling until Congress passed a spending-cuts-only plan to reduce debt.

The only ones to talk about default were Democrats. Everyone with a brain knew that not raising the debt ceiling did not mean default as there was plenty of revenue coming in to pay our sovereign debts. I did not hear one "tea party" person, or even Republican, suggest that we should default.

CNN, as usual, is full of BS.

[Red Dog #1]

NBC...Question: "Are U.S. treasury bonds still safe to invest in?"

Alan Greenspan...Answer: "Very much so. This is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default."

don't worry, the bonds will be repaid as they come due. The only question is just how worthless the repayment dollars will be.

[BobL]

“NBC...Question: “Are U.S. treasury bonds still safe to invest in?”

Alan Greenspan...Answer: “Very much so. This is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default.”

Amazing. And it’s not like the Chinese don’t watch these shows (or even frequent these websites - hi Phoebie). In a few short years, the Chinese will calmly ask us to start paying them back. A few years after that, they will demand repayment. And a few years after that, once they have the means, they will come here and collect....while we’re still waiting for the green economy to materialize and going broke paying off baby boomers.

[Oceander]

don't worry, the bonds will be repaid as they come due. The only question is just how worthless the repayment dollars will be.

You nailed it exactly. And that, of course, is one of the reasons that a sovereign's debt would get downgraded, a reason that is inapplicable to private companies because they (generally) don't have the power to issue their own currencies. Actually, come to think of it, I believe my statement is not entirely correct: I believe that a private company's debt could get downgraded for currency risk precisely if that debt was all repayable in the currency of a country that was preparing to debase its currency and let inflation devalue matters. That, of course, makes that company's debt riskier - the likely PV of the return to investment decreases because of the increased likelihood that the repayment currency will be devalued - and thus the debt becomes riskier and, at a certain quantum of increased risk, must be downgraded.

[BobL]

“S&P didn’t go nearly far enough. Treasuries are worth about a _C_ at best, but we can be sure that socialists will continue to rob bond investors.”

The writing was on the wall when Bush-43 was prez, but it became OBVIOUS in 2009 when Obama was hell-bent to keep spending money despite the trillion plus deficits. That’s when I ‘rebalanced’ my savings and started stockpiling. This day had to come...but they would have served us MUCH, MUCH, better if it had been 2009 (or earlier).

[Red Dog #1]

BobL,
One thing to consider. All trade is always balanced. Every time. Always. And that's the problem for China and us.

Instead of trading for US products, China has chosen to trade their dollars for US Treasury debt in place of computers, natural resources, airplanes, etc. Thus our trade deficit, as normally defined, was necessary for our national debt to accumulated in the manner it has.

Either they'll have to find another use for the dollars, keep buy questionable US Treasury bonds, find another country to dump there products in or stagnate (just like Japan).

For all of China's talk, they're also in a bad spot.

RD

[Oceander]

True enough; however, who suffers worse if that debt is downgraded? Who suffers worse if the debtor starts to default and/or repudiate? China, obviously, takes a big hit, but is there a scenario under which the Chinese Communist Party might consider the hit to be worth the results?

[BobL]

“For all of China’s talk, they’re also in a bad spot.”

All things are relative. Essentially the Chinese gave us their goods, as they had probably figured out that we’d never pay them back.

When they come to terms with that, they’ll write us off (i.e., no more trade priced in dollars) and then look to the 800,000,000 or so people that they have in their own country that could use the same products, and perhaps even pay them in hard currency. They’ll also be able to trade with most countries around the world, as their currency will have value.

The only question left for us is whether we keep our nuke deterrent intact as we collapse (as Russia did when they collapsed). If we manage to do that, we may be left alone until we can (hopefully) get liberals out of the way and start the long, slow, rebuilding process.

[icanhasbailout]

S&P is behind the market as usual.

US credit default swaps are trading at 68 basis points which corresponds to a rating of BBB. That’s the present.

The future outlook is far worse. Any businessman given control of a company with a balance sheet like the US has would immediately demand a bankruptcy filing as a necessary prerequisite to restoring financial health.